Clay Christensen and Disruptive Innovation

Here are 5 tips from Clay Christensen professor at HBS and author of The Innovator’s Dilemma and, The Innovator’s Solution.

1) The most ideal market segment is the one that isn’t being served.

When the only other option is nothing, by default your product is better. So strive to find that product and market.

Solar panels cannot seem to find their place in the United States; the power they generate is insufficient and the technology is cumbersome. However, in Mongolia, solar panels are sold everywhere for powering TV sets. The reason the market is better in Mongolia is because the alternative to solar power is no power; there is no competition with a better form of energy.

Seems like a no-brainer concept, but a lot of companies aren’t catching on. In 1979 all the major electronics companies were trying to develop their vacuum tubes for high-end tabletop radios, floor-standing TVs, etc. Meanwhile, Sony realized that their technology wasn’t as good as the competition’s but it was good enough for teenagers who couldn’t afford to buy the high-end products. Sony sold thousands of Walkman portable music players because the alternative to poor quality music was no music.

The lesson is to figure out which markets are not being served because its easier to compete against no competition. This somewhat segues into the next point:

2) Launch the product that is good enough.

If a product will suffice for the market, do not spend millions of dollars in R&D refining it or trying to improve it for the high-end. Just launch it.

Kodak was trying to find a way to replace the traditional glass lens with a plastic one. Though they had a decent plastic frame, it didn’t produce the professional quality pictures they had wanted. For five years Kodak kept working on a way to improve the plastic lens but had few advances. Finally they gave up, changed the market and decided to launch the FunSaver disposable camera. When the alternative to fairly decent pictures of Disneyland is no pictures of Disneyland, everyone was grateful to purchase the FunSaver.

This is entirely speculation, but I think part of the concern Kodak had with launching an inferior product was the detriment to the brand. If done correctly though, I think that there is a way around it. The Kodak Funsaver and Mini Cooper (though not officially BMW, is still associated) are good examples of selling a lower-end product without harming the brand.

The big question is how to apply this lesson to our every day lives? What exactly is “good enough” and how do we know when the R&D team has reached that point? How many features suffice and what development will only result in marginal returns? One way to figure that out is by internalizing the next lesson:

3) Understand the job and you will understand the market

If one can figure out why someone is employing the product/service, then one can better design and market the product. This might have been the most adamant lesson of the day, and it is not as obvious as it seems.

Clay uses McDonalds Milkshakes to explain his lesson. McDonalds wanted to increase milkshake sales, so it brought in consultants to observe how the shakes were being used. They noticed that they were purchased for two distinct jobs. First, commuters were buying them for the long drive to the office. It was better than breakfast sandwiches, bagels, fruit and candy bars because it was cleaner, easy to eat, entertaining, took a long time to drink, and kept the stomach full until lunch. The second milkshake job was for parents looking to buy a child a treat for dinner- the problem was that it took so long for the child to drink that it often tried the parent’s patience and was eventually discarded half full by a stressed-out parent. Because there are two distinct jobs that require different characteristic shakes, there is no one-size-fits-all solution to optimizing the milkshake.

A nice side effect of understanding the job is that it changes the market for that product. The competition for morning McShakes is not just the milkshake category. It’s the entire morning commute job: breakfast sandwiches, bagels, fruit, candy bars and boredom.

4) Disruptive companies can enter all industries

Assuming the trend that all companies try to move up into selling higher-end products where margins are higher, there is always room for companies to enter in the lower-end market where the more established companies care less.

This trend can be seen in several industries including steel, automobile, animation, computers, digital cameras, airlines, healthcare and several others. Take retailing as an example. Department stores such as Macy’s originally sold hard goods (paint, tools) and soft goods (shoes, clothes), where the highest margins were. When Wal-Mart and other mass discount stores came into the industry, they sold the lower-end hard goods. Meanwhile, the department stores were willing to give up the lower-end products and focus on the more profitable soft goods. Slowly but surely, the mass discount stores started selling more soft goods and eating into the department stores’ space. So what is coming in below mass discount stores? Perhaps e-commerce retailers will be the next phase of the retail industry’s evolution.

This provides a good framework for thinking about how industries are changing and what to expect for the future. It also gives a strong warning to think twice before exiting a product segment and entering a new one. It certainly is not a bad idea to market the more profitable product, but keep an eye out for the evolution and figure out where you fit in.

5) Outsourcing can be dangerous, so do it with care

Be careful when outsourcing functions of the company; if one goes overboard he or she might outsource the value of their company.

Computer manufacturers are notorious about over-sourcing, but it could easily happen to any company. Well-established, vertically integrated companies are always seeking to improve stock price by raising revenues or decreasing costs, or decreasing assets. Ways to decrease costs and assets is by outsourcing work, which will close down factories, and lighten up salaries and benefits. True story of one computer manufacturer: what began with outsourcing chip making and board manufacturing, continued to design and supply. Each time the outsourcee told the computer company, “its not your core competency to do this, let me do it for cheaper.” Meanwhile, revenues stayed the same, while the assets and costs decreased and stock price improved; it was in the interest of the stockholders to outsource. Eventually the company had nothing left but its brand. And then the outsourcee went directly to Best Buy, and said, “forget about that computer manufacturer, would you like us to make you ‘Best Buy’ branded computers?”

The way to get around the dilemma above is to own the outsourcee. If that is not possible, consider this: core competency is not the way to determine what to outsource. Instead, one should determine where will value be in the future (which is where the company will need to make core in the future) and internalize that job.